Sequence of return risk arises from those cycles of good years and bad ones. You cannot ignore it, particularly if you plan to retire now and will begin withdrawing money from your investments. You need to understand its potential to wreck your retirement plans. “Don’t worry, you’re fine,” a misguided advisor may tell you. “Look here, your investment averaged 8 percent over the last three decades, so you can take out 5 percent and even increase it for inflation at 3 percent, no problem.” But it’s a big problem if you encounter some bad years early on.

A bad year or two may not have hurt you during the years when you made no withdrawals or were contributing to the account, because a good year or two could turn that around. Now, if those bad years come at the same time that you are siphoning money away for your income needs, the good years later on may not be able to overcome the hit. When choosing an investment for your portfolio, a high historical average should no longer be a key factor. That average rate of return is measured simply as an average over the years. Some are good years, some less so. In Distribution Land, you won’t have the investment long enough to care about the average return. Your advisor should be accounting for sequence of return risk by implementing different money management strategies.

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“I have it there for emergencies,” she explained.

Few of us need access to all of our money at one time. Holding on to $300,000, a large amount of liquid assets, is often squandering potential. The price of liquidity is a low rate of return, and low growth means that inflation may overtake you.

Don’t Overlook This Big Retirement Risk

Keeping direct access to all of your cash is a depression mentality: Some of those who endured hard times held on so tightly to their money that they sacrificed growth and eventually succumbed to the ravages of inflation. Remember your Grandma saying, “A dollar doesn’t buy what it used to buy?”

Be wary of the depression mentality as you approach retirement. If you have a hard time letting go of your liquidity, a financial advisor (www.familywealthadvisory.com) can help by creating a written retirement income plan that spells out the details and strives to make you feel comfortable with your potential future income growth.

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You may have seen what is called the “risk pyramid,” rising from conservative fixed investments at the bottom to more aggressive growth vehicles at the top. Imagine that pyramid toppled on its side. You would have, at the left, the widest part—the fixed investments. At the right you would have the growth investments. This pyramid on its side is another way to visualize the time sequences in certain types of income planning. 

How does it work? Reliable sources of income such as Social Security, perhaps a pension, and income from a job are calculated first. Then we put in the targeted growth rate, and we use conservative figures. Then we set up four to six segments, usually in five-year payout periods. The first bucket takes you to five years into retirement; the second takes you to ten years; and so on. This process supports the use of the Time Segment Model.

If this sounds like a good plan for your retirement needs, get in touch at www.familywealthadvisory.com for more information.

*ROI Reliability of Income is a registered trademark of Wealth2k, Inc. Used with permission.

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One couple came to my office saying they wanted to retire in about five years, at age 60, and they wanted to pay for the kids’ college educations, and they wanted to pay for two daughters’ weddings. “Those are noble goals,” I told them, and I figured they must have the assets to handle them. But all they had was $50,000 in an IRA. I gave them the bad news: They would need to keep working, and they couldn’t afford those tuitions and weddings.

When people hear that, they sometimes search for somebody who tells them otherwise and will validate their opinion. And then they may enter dangerous territory. Never forget: Fearsome creatures can get you in Distribution Land. Visit www.familywealthadvisory.com for more information on how to start laying suitable plans for your future.

Your financial planner should be in the business of helping people thrive in retirement, not patting their backs as they head into peril. That’s why so much emphasis should be placed on defining goals and organizing life priorities; that’s one of the best ways for you to organize your finances.

Who Is The Client, You Or Your Money_

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The country faces not only a tide of baby boomers but also an increase in life expectancy. In 1935, when Social Security began, retirement lasted but a few years. Today it lasts a few decades and longer. For a couple both aged 65 today, according to projections, there’s a 50 percent chance that one will live to 92 and a 25 percent chance one will live to 97. The population is aging 2.

These days, from a financial standpoint, the primal fear often is not that a retiree will die too soon, but rather that they will live too long. This shouldn’t be a fear but rather cause for celebration! Change your outlook simply by preparing wisely for your retirement future – establish your priorities, find the right financial advisor, plan for possible detours – enjoy the ride.

1Social Security – ssa.gov/history/pdf/tr07summary.pdf
2 American Council of Life Insurers – acli.com/Tools/IndustryFacts/LifeInsurersFactBook/
Documents/FB11Mortality.pdf (11/18/2011)

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Now you are crossing through the mist into a new world, everything looks different. Now you are withdrawing money for income, and time may no longer be your friend. If the market drops while you are pulling from your portfolio for your income needs, you could be in trouble. You might not be buying any more shares at a bargain; rather, you could be forced to sell at just the wrong time—and you don’t have years stretching ahead of you for a recovery. What you did before might not work anymore. In this land, you need different weapons for survival.

Managing risk is the most important aspect of good retirement planning, not pumping up your investment return. Retirement is no longer as simple as signing up for Social Security, collecting your pension, and settling back. Rather you are preparing for a new phase of life and dealing with different factors that contribute to that way of life. For example, you are most likely planning to be more active, will live and work longer, and, for income, need to rely more on what you’ve saved. And that means ensuring that this income has the potential to last for your lifetime and to weather rising health care expenses, inflation, and market ups and downs.

Help ensure that you are on the right track for an optimal trip through this new land. Strive to avoid pit stops and potential dangers by educating yourself and surrounding yourself with a team of professionals for your needs. Make strategic partnerships to provide guidance along the way – don’t go it alone. Wonder where to start? Visit www.mysecondopiniontoday.com for some free advice on if you are headed in the right direction.

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